The U.S. Treasury market opened June with the 2-year yield at 4.00%, above the pre-war low of 3.40%. It rose to 4.23% mid-month before the rally in the second half of the month lowered it to 4.17%, an overall increase of 17 basis points (bps). The 5- and 10-year U.S. Treasury yields followed a similar pattern, closing modestly higher, while the 30-year bond was the only maturity to close with a lower yield.
The catalyst for the mid-month reversal in yields was the market's positive response to the Federal Reserve's (Fed's) near-term policy outlook. That response followed the Federal Open Market Committee (FOMC) meeting — the first under new Chairman Kevin Warsh — which was the month’s most significant macroeconomic event. The Fed held rates steady at 3.63%, but its dot plot, which shows policymakers' individual interest-rate projections, revealed that interest rates are likely to remain higher for longer, with nine officials projecting at least one rate hike in 2026 and six expecting two or more. Warsh also signaled new changes to the Fed’s communication practices, explicitly stepping back from forward guidance, or providing advance indications of the likely path for future interest rates, to preserve flexibility as economic conditions evolve
Market expectations for Fed policy shifted significantly during the month, reflecting the war's impact on energy and commodity prices, continued economic resilience, and inflationary pressure from the artificial intelligence buildout. At the beginning of the year, markets had priced in two to three interest rate cuts by year-end. That expectation has since shifted to one rate increase by year-end.
Agency mortgage-backed securities kept pace with U.S. Treasuries during the month. Securities with coupon rates between 4.5% and 5.5% benefited from relatively stable market conditions and continued demand, supported by elevated mortgage rates. We maintain an overweight position in the sector because it offers higher yields than U.S. Treasuries. However, we have become more cautious as the Fed's new communication practices may provide less forward guidance, potentially increasing market volatility, which could negatively affect mortgage-backed securities prices.
